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Initial Coin Offerings: What does the future hold for the crypto-economy?

Nitin Upadhyay

The technological innovation triggered the commercialisation of the Internet. In the late 1990s, digital currencies and tokens in the form of loyalty points have flourished the Internet. People could earn rewards over the e-commerce platform for buying and selling of goods and services. In the World of Warcraft gaming system, the digital currency – “gold” was used. During the pre-blockchain era, various micropayments, payment, and currency systems proliferated, for example, eCash, e-Gold and PayPal, which also got affected by the technical, ethical and legal sphere. The advent of another technological innovation, Blockchain, resulted in the widespread usage and proliferation of virtual currencies and payment systems but without the involvement of intermediaries or third parties. In the era of the Blockchain, the firms are rushing for the initial coin offering (ICO). The ICO, otherwise called a token sale or token launch, enables a firm to build an ecosystem of the stakeholders where the stakeholder gets the benefit of the firm’s new product utility. The stakeholder can participate early in the development and utilization of the product. The tokens help the firms to develop, build, and deploy their product for the established user base as part of the ecosystem.

Usually, a coin and a token are used interchangeably, but in the context of business and the technological sphere, both have different meanings. Coins can be classified as – a native coin (crypto-currency), an infrastructure coin and a token. In the Blockchain, a coin is a native unit value which is used as a mean of exchange within the blockchain network and also to incentivise the network participants to use it. Beyond exchanging value, the native coin has limited functionality. Some popular native coins are Bitcoin, Ether, Ripple and Litecoin. The Ethereum’s native coin, Ether, also referred to as an infrastructure coin, is used within the network to exchange value, and the network protocol supports an added functionality of a smart contract by which logic can be coded into the Blockchain. Finally, the third category of the coin is the utility token by which the owner of the token avail specific products or services. The coin market is divided into two types – crypto-currency and crypto-token. The crypto-currency market deals with the native and infrastructure coins, and the crypto-token markets deal with the token, ie, utility coins. Through smart contracts, business logic or process can be executed automatically on the Blockchain.

Besides, tokens can be created via smart contracts that can represent any asset or functionality that is desired by the creator or developer. These additional digital tokens are also known as coloured coins or altcoins, represent any asset and functionality as per the business context. Moreover, it helps the community to avoid building an entirely new independent network and utilize those in the ecosystem. It is the coloured coin protocol that enables startups to pitch and kick-off projects by launching token sales reasonably rapidly and grow exponentially.

The crypto-market has emerged as a potential alternative source of the current regulated financing market. One of the leading crypto-market data provider firms reports fundraising of around 13 billion USD from investors between April 2014 and May 2018. The term ICO is emerged due to its resemblance to raising funds through the IPO (initial public offering). In the IPO, the private firm lists its shares on a public stock exchange (sell its shares or equity percentage in exchange for additional capital from investors). However, contrary to the IPO process, which is strictly regulated, the ICO is currently unregulated. As the ICO platform is globally decentralised, it does not enforce any jurisdiction to the issuers. Neither the issuers have to register with any securities, nor do they have to provide any periodic and non-financial disclosure while participating in the ICOs. The investors who are investing in projects now take a route to the ICOs.

Contrary to the equity securities of the firm, a token does not guarantee grant of any control rights, claims to dividends or liquidation value. Thus, the primary purpose of the buyers is to buy the token to avail utility value or service or for speculative reasons, such as a higher resale price. Many startups and mature companies have started building a decentralised application (Daap) and tokens on top of the Ethereum. Even a token standard ERC-20 has been developed that allows the interoperability of tokens on the Ethereum network. By adhering to the ERC-20 standard, the companies can increase network effects and contribute to the higher value of the Dapps tokens.

Given the success and momentum in the growth of the crypto-market through the ICO and rising concerns regarding investor protection, several regulators are considering keeping part of ICO to be as securities. However, securities regulators and governments are carefully observing and contemplating this nascent but fast-growing market and regulatory actions. Due to the rapid development in the crypto-market, it is easy to witness that we are in another economic bubble. And, the regulatory bodies and government will decide whether these ICOs and tokens will flourish in the future or not. However, it is quite evident that the crypto-market offers an exciting opportunity and value proposition that is unmatched by any existing technologies. The initial coin offering can be a sign of another economic bubble – crypto-economy, but it is also a silver lining for developing funds that disrupt the venture capital landscape.

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